Discover and learn more about the differences between Mutual Funds and Recurring Deposits to optimise your investment strategy and achieve financial goals.
Overview
Recurring deposits (RDs) and mutual funds are two types of investments, however they are not the same. Mutual funds combine the capital of several investors to invest in a wide range of stocks, bonds, and other assets. Although there is a greater chance of profit with this method, there is also a bigger risk involved. RDs, on the other hand, are a low-risk savings option offered by banks, where you deposit a fixed amount regularly, and you earn a predetermined interest rate. While mutual funds offer the potential for greater returns, RDs are a safer choice, making them suitable for risk-averse investors looking for stable and guaranteed returns over a fixed period.
Difference Between Mutual Funds vs Recurring Deposits
| Aspect | Mutual Funds | Recurring Deposits |
| Nature of Investment | Investment in a portfolio of stocks, bonds, or other securities | Fixed investment at a set interest rate |
| Returns | Variable returns, potentially higher but subject to market risks | Fixed and guaranteed returns, generally lower |
| Risk Level | Moderate to high risk due to market fluctuations | Virtually risk-free with guaranteed returns |
| Liquidity | High liquidity, can buy and sell units at any time | Limited liquidity with penalties for premature withdrawals |
| Tenure | No fixed tenure, can be short or long term | Fixed and predetermined tenure, typically 6 months to 10 years |
| Lock-In Period | Generally no lock-in period | Typically no lock-in, but limited withdrawal options |
| Taxation | Taxed based on capital gains and dividend income | Interest income may be subject to taxation |
| Return Potential | Higher potential returns, but not guaranteed | Guaranteed returns, but generally lower |
| Suitable For | Investors seeking long-term growth, willing to take market risks | Risk-averse investors looking for fixed returns |
| Investment Amount | Varied, starting from small amounts | Fixed and predetermined monthly investment |
| Flexibility | Ability to choose from various fund types and asset classes | Limited flexibility, fixed monthly contributions |
| Goal Alignment | Ideal for wealth creation and financial goals with higher returns | Suitable for short-term goals and risk-averse investors |
| Insurance Component | No insurance component | No insurance component |
| Rate of Return | Not fixed, depends on market performance | Fixed and predetermined interest rate |
Returns in Mutual Funds
- Mutual fund returns are not guaranteed and can vary depending on the type of fund, the underlying assets allocation, and market conditions
- Although they carry a greater risk profile, equity mutual funds have the potential to yield better returns than debt mutual funds
- Debt mutual funds are generally less risky than equity mutual funds, but they also offer lower returns
- With a combination of debt and equity exposure, hybrid mutual funds provide a mid-level risk-return profile
- ETFs and index funds follow a particular market index, such the Sensex of Nifty 50, and provide returns that are comparable to the index’s performance.
Returns in Recurring Deposit
- The bank or post office where you start the account usually fixes and guarantees the returns on recurring deposits
- RD interest rates vary depending on the bank or post office, the tenure of the deposit, and the amount invested
- Because the returns on investment are guaranteed, RDs are typically seen as a low-risk investment choice
- On the other hand, when considering alternative investment alternatives like equities and mutual funds, returns on RDs are likewise quite poor.
RD Interest Rates Offered by Different Banks in India
| Bank | Interest rate for 1 year RD |
| State Bank of India | 7.25% |
| HDFC Bank | 7.00% |
| ICICI Bank | 6.75% |
| Axis Bank | 6.50% |
| Kotak Mahindra Bank | 6.25% |
Note: These interests may change from time to time. For more detailed information get in touch with professionals from time.
Mutual Funds vs Recurring Deposits: Real-World Scenarios:
Scenario 1 – You want to build an emergency fund for unexpected expenses
Choice: RDs might be more suitable due to the safety of your principal amount and the ease of accessing funds upon maturity.
Scenario 2 – You aim to create wealth over the long term
Choice: Mutual funds, especially equity funds, offer higher growth potential over the years and are better suited for this goal.
Scenario 3 – You seek tax benefits while investing
Choice: Mutual funds like ELSS offer tax benefits under Section 80C, making them an attractive option for tax planning.
Scenario 4 – You have a short-term financial goal.
Choice: RDs with a fixed interest rate provide predictability and safety for short-term goals.
| Disclaimer: The above mentioned tips are just for informational purposes and do not suggest or support any form of investment. Remember all the investments are subject to market risks. It’s paramount to consult investment experts before making investments. Vakilsearch does not endorse and does not recommend making investments to the readers. |
Conclusion
It is evident from the comparison of mutual funds and recurring deposits that while mutual funds have the potential to yield better returns, they also carry risks associated to the market. Conversely, Recurring Deposits offer a reduced opportunity for development but a fixed, safer return. Which one you choose should be based on your investing horizon, risk tolerance, and financial objectives. In the end, the choice you make should be in line with your unique financial goals and needs. have in contact with our Vakilsearch professionals for further information to have all of your questions answered.
FAQs
Which is the best recurring deposit or mutual fund?
Recurring deposits (RDs) offer fixed and guaranteed returns, while mutual funds offer variable returns. Generally speaking, mutual funds carry a higher level of risk while investing than RDs. Your unique situation and level of risk tolerance will determine which investing strategy is ideal for you.
Where do you invest in a mutual fund?
Mutual fund investments can be made directly with the mutual fund company or through a licenced broker. A structured investment plan (SIP), which enables you to regularly invest a certain amount of money, is another way you can invest in mutual funds.
Who should invest in recurring deposit?
Investors with a short to medium-term investment horizon and a modest risk appetite might choose RDs. For investors seeking a guaranteed return while saving money consistently, RDs are a great choice.
Where to invest instead of RD?
You may want to think about investing in bonds, equities, or mutual funds if you want returns that are higher than those of RDs. These investing alternatives do, however, carry a higher risk. Before making any investing decisions, it is important to thoroughly assess your investment goals and risk tolerance.
Should I invest in RD or SIP?
If you are looking for a low-risk investment option with guaranteed returns, then you should invest in RDs. If you are looking for a higher-risk investment option with the potential for higher returns, then you should invest in SIPs.
Which is profitable: RD or FD?
RDs and fixed deposits (FDs) are both low-risk investment options that offer fixed returns. However, RDs typically offer higher interest rates than FDs. Additionally, RDs allow you to deposit money on a regular basis, which can help you to save more money over time.
